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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's RSI Tutorial

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Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 03/27/2017
20,551 -45.74 -0.2%
8,935 6.33 0.1%
702 -3.50 -0.5%
5,840 11.63 0.2%
2,342 -2.39 -0.1%
YTD
4.0%
-1.2%
6.5%
8.5%
4.6%
Tom's Targets    Overview: 03/14/2017
20,100 or 21,250 by 04/15/2017
8,500 or 9,500 by 04/15/2017
675 or 715 by 04/01/2017
5,950 or 5,650 by 04/15/2017
2,275 or 2,425 by 04/15/2017
Mutt Losers: None YTD
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

This article discusses failure swings and divergence in the Wilder relative strength index.

 

RSI Tutorial: Price Rules

Let me be clear. There is only one indicator that I use every day on every stock. Can you guess what it is? It's not the commodity channel index because I only use that on stocks I own. It's not Bollinger bands for the same reason. It's not even the Wilder relative strength index, the subject of this article.

It's price.

Price has never failed me, never given a bad signal. I don't like the direction it takes sometimes, but that's just the nature of this business.

Having written that, I do use indicators, but only under certain circumstances.

  • When I am shopping for a stock to buy. I will check the commodity channel index and relative strength index, but not to trade on those signals. Rather, I use them to look at what they say. If I see bearish divergence, then it might rethink my buy. If it looks like the commodity channel index will make a bullish crossover, then that is good.
  • If I own a stock, I will use the commodity channel index and relative strength index just to see what they tell me. Then I ignore it. Go figure. I consider the information as background research that may help lead me to a conclusion that it's time to sell. I do not dump a stock simply because an indicator says it's time to sell.

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Wilder Relative Strength Index

Let's talk about the relative strength index, or RSI. I show my version of it on the daily chart of the Dow transports (^DJT) using 70/30 as the lines between over bought (shaded red) and over sold (shaded green) with a 14-day look back on the buy and sell lines. Since both the buy and sell lines use the same look back, only one line appears. If the look backs were different, you would see a second line -- one would be used to time the entry and another for the exit.

This chart is probably unlike other charts you are used to seeing. That's because it's part of software I wrote. And no, you can't have the program. I'd spend a week telling each of you how to work it, and I don't have that kind of time.

A picture of the relative strength index and Dow transports.

The chart may look a bit fuzzy and that's because I had to reduce the size of it a bit. Think of the fuzziness as a bonus. No extra charge.

The top half of the chart shows the Dow and the bottom half shows the RSI. The vertical green and red bars are the indicator buy and sell signals overlayed on the price chart.

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RSI Tutorial: Bullish Divergence

On the left you see the transports making a lower low during October 2008 while the indicator makes higher bottoms. This is a sign of bullish divergence. Price will often, but not always, follow the indicator trend (upward in this case). You can see that price moved up to point A.

Incidentally, in a downtrend, look for divergence along the bottoms. In an uptrend, use the peaks.

RSI Tutorial: Failure Swings

Failure swings mark reliable short term turning points. They are W and M shaped patterns that you can find on many indicators for your viewing pleasure.

I show two of them circled on the chart. The W is bullish and the M is bearish. Price rises in March and it changes from moving up to trending horizontally in May (or down for a week or so). The price change after a failure swing is often of short-term duration, not major turning points like that shown here.

Finally, there are the vertical buy and sell signals. You can see how premature the green ones were back in October. But they were quite timely in late February and into March. Recently, sell signals have appeared because the RSI has moved into overbought territory. If the indicator drops, it could also be a bearish failure swing. That would mean a dip is coming in the transports.

Buyer beware...

-- Thomas Bulkowski

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See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Experience varies directly with equipment ruined.